True or False? The money you have now is worth more than the money you will have later.
This is a weird concept to me. I’ve always thought money is money, whenever it is. But Alex told me about this concept years ago and it completely changed my perspective on saving, investing, and personal finance. Apparently, these kinds of magical ideas are very common in economics - but if you are like me, it’s pretty shocking!
We all know that money grows over time. If it’s in a bank account it will grow very slowly (because the bank pays you a TINY amount money to “borrow” your money while it’s staying with them - at low risk to you). If your money is in an investment account it will grow a little bit faster (because the companies you invest in will pay you a SMALL amount of money to “borrow” your money while it’s staying with them - at a more moderate risk to you). This compound interest then grows over time.
If I make $10 dollars and put it in an investment account in 2018, it will earn a small amount of compound interest each year. In 10 years my money will have doubled (assuming the stock market follows historical trends). So, in 2028 I will have $20. But by 2038 I will have $40 (because it doubles again). It sounds rather paltry when you are talking about $10, but what if it was $1,000? In ten years my money would earn me another $1,000 (just by being money), and in 20 years I would have $4,000. However…wait for it…if I wait to invest $10 until 2028, then by 2038 I will only have $20, instead of the $40 I would have if I had invested it this year! (TA DA!) The money I invest now is worth more than the money I invest later!
Growth of Investments over Time
Financial investing is a commitment we make to our future. It’s a big ol’ hug to our future selves. This idea has real implications on how I choose to spend my money now compared to my long-term financial (and life!) goals. At some point (sooner rather than later), I would like to not have to work for money. I would like to be able to make significant donations to charity. I would like to hire a personal chef. (Okay, not really...but in my dreams). These future long-term goals are really important to me, so present Kate wants to give future Kate a leg up. Because I now know my current money is worth more than my future money, I’m willing to limit my spending in order to more aggressively save and invest now to create the life I want in the future!
I am also intrigued by this concept because it shows that there are REAL reasons why I should not put off saving and investing. Everyone says saving and investing is a good idea, but until I learned about the immense power my current money has in the future I didn’t really understand what the big deal was. But now this “weird” idea has wildly impacted my spending and saving habits, and I wanted to share it with you.
If you haven’t already, get out there and invest in the future you!